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U.K.'s Osborne Takes Heat Over Budget's 'Granny Tax'

By

Cassell Bryan-Low and

Nicholas Winning

Updated March 22, 2012 7:56 p.m. ET

LONDON—U.K. Chancellor of the Exchequer George Osborne faced a public backlash on Thursday as his U.K. budget—pitched as a determined move to fix the economy through austerity—instead was assailed as pandering to the rich while hitting pensioners with what was quickly dubbed a "granny tax."

The resulting political mess was a setback to Mr. Osborne's Conservative Party, which has worked hard to rebrand itself. In 2002, then-Tory Chairwoman Theresa May lamented that some people called the Conservatives the "Nasty Party."

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The budget spat began Wednesday, when Mr. Osborne included a provision dropping the country's top personal income-tax rate to 45% from 50% for those who earn more than £150,000 ($198,600) annually.

At the same time, the budget included a measure freezing a threshold above which people pay income taxes, which will result in slightly higher payments for some pensioners over time. Both measures take effect in April 2013.

While the income-tax rate cut had been widely expected, the changes for pensioners hadn't been flagged ahead of time. Mr. Osborne awoke Thursday to a swath of front-page headlines—including in traditionally Conservative-friendly publications—describing it as the "granny tax."

The opposition Labour Party was quick to seize the moment.

"The budget is giving a £40,000 tax cut to millionaires each and every year and it is funding that by hitting pensioners who have worked hard all their lives and played by the rules," said Labour Party leader Ed Miliband.

Ros Altmann,
the director-general of Saga, a company that provides financial services and holiday planning for people over the age of 50, said the measure was an outrageous assault on middle-class pensioners.

Mr. Osborne, during rounds of interviews on television and radio shows Thursday, defended the budget. He said pensioners weren't losing cash, because the freeze in benefits meant the tax threshold wouldn't go up with inflation, and that net changes made by the government meant retirees were better off because of the previously announced increase in the basic state pension.

The government has said the changes to the pension system were part of a drive to simplify the tax system in a fair manner, while the tax-rate cut wouldn't make a big difference to revenue but was important for attracting entrepreneurs and business. It also said it expected the rich to end up paying more overall as a result of other new measures, including increased property taxes and efforts to clamp down on tax avoidance.

The backlash comes even though neither the tax-rate cut nor the pension moves have much financial impact.

The government said the pension-allowance freeze will save the government about £3 billion over four years and will affect about 4.4 million pensioners, roughly 40% of the total. The new system means pensioners would be on average £83 per year worse off, while those who are about to retire would lose £285, it said.

As with other countries, the U.K. faces increasing pension costs over the long term as the number of people claiming pensions is expected to grow. To tackle that, the government is increasing the state pension age. The pension-allowance freeze is also a small measure to help address that issue.

"Despite this morning's headlines, this looks like a relatively modest tax increase on a group hitherto well sheltered from tax and benefit changes," said
Paul Johnson,
director at the Institute for Fiscal Studies, a respected economic think tank. "From this budget, we calculate that pensioners will lose on average about one-quarter of one percent of their income in 2014."

Meanwhile, the government said the cut in the top tax rate would cost about £100 million in lost revenue annually.

Still, economists—including at the body that provides independent forecasts to the government—said it was difficult to estimate the impact of changing higher income-tax rates, in large part because of the challenge in predicting whether people would leave the country as a result or have found other ways to shelter their taxable income.

The longer-term political effect on the Conservative Party is difficult to measure.

The concern about pensioners comes as many already are suffering from the U.K.'s interest rates being at historical lows, which has eaten into savings income.

Laurence Janta-Litinski,
a senior political researcher at polling firm YouGov, said evidence suggests elderly voters turn out predominantly for Mr. Osborne's Conservatives, but it remained to be seen if the measure has hurt support for the larger party in the governing coalition.